The Case for Risk Analytics in Banking

As regional and international banks emerge from the 2008 financial crisis, many institutions are continuing a strong focus on risk management to ensure that they’re complying with more stringent regulations and are loaning and investing cash wisely.

Risk concerns continue to be top-of-mind for bankers. A combination of lower asset yields and loosening loan terms for mid-market and large businesses amid an uptick in commercial and industrial lending is increasing risks for banks, according to an article in American Banker.

“As profits on loans narrow and competition for borrowers intensifies, banks tend to underwrite a greater number of loans to companies with looser lending restrictions,” according to American Banker.

The good news is that banks and other financial services companies are recognizing the role that analytics can play in helping to mitigate risks. Banks are increasing their year-over-year investments in analytics more than any other industry, including the insurance and chemicals industries, according to a report by Accenture.

In fact, 73% of banks plan to increase their investments by more than 10%, according to Accenture. The areas where banks are expected to drive the highest amount of investment in risk analytics are data quality and sourcing, systems integration and modeling.

These are certainly areas where banks need to pump up their investments. Too many banks and financial services companies have silos of customer information that are spread out among different channels (mobile, online, branch, ATM) and among lines of business (checking and saving, loans and mortgages, investment accounts, etc.).

By pooling information together across these various functions and channels and applying analytics against a broader swath of information, account managers and product leaders can obtain a more complete view of customer accounts, including personal and commercial accounts, to better assess the risks associated with individual customer activities and portfolios.

There are numerous ways that banks of all types can apply analytics to better mitigate and manage risk. For instance, investment banks, asset management firms, and hedge funds can use risk analytics to adjust their operating principles to align with market and investment shifts.

“There is no exact science for measuring risk. But with analytics, you can build measurement parameters that can help you establish and examine likely risk scenarios,” according to Deloitte. “From there, it’s easier to understand the potential impact of a risk – and start planning around it.”

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